Energy Semantics I: Further Thoughts on Sheinbaum’s Reform
As expected, Congress gave the final approval of new energy sector legal framework, which President Sheinbaum promulgated on March 18, the anniversary of the 1938 oil expropriation. Through this symbolism, the government underscores its message that, in its view, this new reform will undo the damage from the much maligned “neoliberal” 2013-2014 energy reform, and which returns Pemex and CFE to their status as state-owned companies. Behind closed doors, however, symbolism takes a backset to pragmatism.
According to industry participants, representatives from Sheinbaum’s administration have been holding conversations with investors, conveying the message that, despite the nationalistic tone around the reform, the government is in fact keen on attracting companies (and funds) to invest in the Mexican energy sector. In particular, Pemex and CFE have held talks with banks, assuring them that there will be ways for to private players to invest in this new era – ways that will resemble what they already know.
CFE is planning to finish ongoing projects or build new power plants with models where the operating company would not be obligated to have the state-owned company as a shareholder, only a long-term purchase agreement between the project and CFE. As for concerns from some investors regarding the 54% threshold included in the new law, the government representatives point out that the law mentions that CFE would need to supply at least 54% of the electricity, which leaves the door open for the project itself to be owned and operated by a third party without CFE intervention.
The company is also working on a model where it would be offtaker of up to 70% in the project, meaning CFE would not buy more than 70% of the electricity generated in the case of a power plant. This way, the state-owned company would not have to consolidate the amount to pay under the long-term contract as debt on its balance sheet, giving it greater financial flexibility. Moreover, CFE officials are telling bankers there could be competitive processes to acquire electricity – they just would not be called “tenders”.
Energy Semantics II: Fracking, Quietly
Continuing with the rewording in the energy sector, Pemex CEO Víctor Rodríguez attended a forum in Mexico City organized by the Mexican College of Petroleum Engineers (CIPM) to discuss the unconventional resources in the country. “It’s important to convey to the Mexican government the need to make a historic decision about what direction the upstream sector must take. And lay the foundations so it can be developed in the next 10 to 20 years,” said Rodriguez during his inaugural speech.
Unconventional resources in the oil and gas sector include, among others, the ones trapped in deep waters. However, Rodríguez and other Pemex officials participating in the forum made clear that they meant the other kind of unconventional resources: shale and oil gas trapped in onshore areas of Mexico. Rodríguez was careful not to utter the F-word, fracking, as former President Andres Manuel Lopez Obrador forbade using this technology in Mexico to exploit shale resources located mostly in the country’s northeast. President Sheinbaum has thus far followed her mentor’s prohibition, but it seems that some in her team are trying to explore ways to tap those resources, which are believed to contain large reserves of oil and gas as they are a continuity of the shale basins that have allowed the US to become the largest oil and gas producer in the world over the last two decades.
The Eagle Ford Shale formation only stops at the border in maps
Source: US Energy Information Administration
Previous editions of this newsletter have discussed some of Pemex’s plans approved by the hydrocarbon regulator CNH to explore shale basins. Tapping those resources could take over a decade. Sheinbaum’s government wants to bring this into the discussion, but at this point it’s hard to know if her team would find a way to explore that potential without raising the alarms of the environmental groups – or AMLO.
Mexico imports around 70% of its natural gas needs from the US, or 90% if we don’t count the gas that Pemex itself uses for its industrial processes or to pump crude. Diversification should be a priority for Mexico but, even if fracking is not technically banned, the administration must first tame Mexico’s energy nationalistic ideology and AMLO’s heritage.
Low reserve replacement ratio underscores the need for diversification
Source: Pemex presentation at CIPM event
Good cop, bad cop: Sener said to mull terminating some contracts
While some in the administration are trying to play the part of the good energy cop, the Energy Ministry (Sener) is said to be acting the part of the bad cop, with plans to terminate private-sector oil contracts and transfer them to state-owned Pemex if companies fail to meet government expectations. According to a presentation leaked online, Sener conducted its own analysis on the status of 56 contracts held by private-sector companies. It found that 22 of the 56 contracts showed little progress in developing their areas, making them subject to early termination, according to the document.
The ministry made an analysis of the companies’ financial and operational capabilities, oil resources in the blocks, their exploration or development phase and whether they have missed fee payments to the state, among other issues. From those 22 contracts, the document lists the companies and their key shareholders. Sener points out seven contracts from the companies Jaguar, Pantera and Tonalli, linked to Mexican businessmen. Spanish firm Iberoamerican is also included in the list of low levels of progress with four contracts. Other companies on the list include China’s Shandong and other local firms such as Diavaz, Consorcio Petrolero 5M and Petrolera Lifting.
In other energy news…
- Mexican businessman Carlos Slim is reportedly in talks with Pemex to invest and operate two of the state-owned company’s largest discoveries in recent years. One is offshore field Zama, in which Slim already participates through the recent purchase of most of the interest of the US oil operator Talos Energy, which discovered the field in 2017. The other project is the onshore gas and oil condensates field Ixachi.
- Pemex is seeking to increase its heavy crude exports to Asian markets to avoid the much threatened US tariffs, even if for now they remain on hold. Pemex could send most of the 500,000 b/d exported to the US to Asian markets, starting with India, currently the company’s second largest buyer. Pemex could start sending regular cargoes to China, a market in which it has sporadically sold crude in the past and which would easily have the capacity to take most of those 500,000 b/d. Pemex would likely see lower profits from these Asia sales, due to both higher logistical costs and the discounts China would likely demand. Pemex primarily sells crude under evergreen or long-term contracts to the US, which would be hard for those buyers to back out of; however, they could resort to rejecting shipments by claiming quality issues, such as excessive water and salt content — concerns raised in recent weeks.
- The increase in high-sulfur fuel oil (HSFO) exports from Pemex over the last six years has indirectly hit the price of its heavy crude, according to an analysis from think tank Observatorio Ciudadano de Energía. Mexico’s fuel oil contains a high percentage of sulfur, making it even less valuable because vessels can’t use it as fuel due to international maritime rules forbidding its use introduced in 2020. These factors led Pemex to export higher quantities to the US, and restart selling its light crude oil. The spread between Pemex’s heavy high sulfur crude Maya and the benchmarks went from minus USD 3.77 per barrel (pb) in 2021 to minus USD 9 pb in 2022, according to the analysis.
- The American Petroleum Institute (API) asked the US Trade Representative (USTR) to call Mexico for a consultation regarding Mexico’s recent agreement to fixed fuel prices in the country, seen as a move against US companies operating gas stations in Mexico, according to a letter sent to the USTR last week. President Sheinbaum said this week that there is no conflict with the USMCA, as it is a voluntary agreement.
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